"Silence may be as
variously shaded as speech."
—Edith Wharton (American,
1862-1937)
Word for the day
Crump (v)
To crunch or make a
crunching sound, as with the teeth.
Malice towards none
Now since most of the book
profits have been eroded, the finance minister may safely consider rolling back
First random thought this morning
While a large majority of political commentators have criticized
the union budget for being unimaginative and short on peoples' expectation, no one
so far has suggested what the finance minister could have done better.
The former finance minister Shri P. Chidambaram has been one of
the most vocal critics of the budget.
All the budget data has been made public. Would it not be better if
PC tells people what he would have done differently, by presenting his version
of the budget based on available data.
Apprehensions growing
Post presentation of Union Budget last week, most capital market
participants have become apprehensive. As of this morning, the apprehension
level is much higher and all encompassing.
Most commentators are attributing the fall to the (a) introduction
of section 112A in the Income Tax Act and amendment of section 115R, that
proposes to tax the long term capital gains arising in respect of equity shares
and units of the equity oriented mutual funds' (MFs) units and impose dividend
distribution tax on equity MF units; and (b) relaxation in the FRBM targets for
another couple of years.
In my view, it is not correct.
The correction in Indian stocks and bond market so far is mostly a
reflection of the global trend, and there is nothing to suggest that equity and
bond prices have corrected due to budget provisions.
For records, the budget estimates of net market borrowing for FY19
at Rs4,07,120cr is 15% lower than the revised estimates for FY18 (Rs.
4,79,864cr) and external debt is budgeted to be net payment of Rs2,589cr in
FY19. Thus the only fear for bonds is sharp rise in crude prices. That at best
is a conjecture at this point in time.
The anecdotal evidence suggest that so far there is no significant
spurt in redemption or SIP cancellations requests with mutual funds.
In my view the correction in prices of stocks and bonds so far is
due to (a) tighter liquidity (actual and anticipated); and (b) rising
inflationary expectations.
Attributing the fall in prices of stocks and bonds to section 112A
and higher fiscal deficit target could therefore be seriously misleading. In my
view, these two factor do not at all warrant any significant correction in the
prices.
So, I would like to ignore these two and remain focus on my
primary premise for price correction, viz., macro worsening, tightening
liquidity, rising cost of capital, rising inflationary expectations, and above
all stretched valuations.
I am adding another factor to my list of negative factors for
financial markets, i.e., rising inconsistency, incongruity and unpredictability
of the policy direction.
The Prime Minister, first added the element of unpredictability
through the step to replace 86% of currency in circulation, apparently without
any conceptual framework. Then many of the government schemes are found to be
inconsistent with the stated objective of "enablement vs. provision".
Introduction of section 112A and amendment to section 115R are prima facie
incongruous with the stated principle of predictability in taxation policy,
especially when the government is actively encouraging lower middle people to
invest in stock and bond markets.
